Money & Banking

RBI diktat on stressed assets weighs on scam-hit PNB’s performance

Radhika Merwin BL Research Bureau | Updated on May 15, 2018 Published on May 15, 2018

Central bank’s dispensation on MTM losses, provisioning for IBC cases offer little respite



It was only six months ago that the stocks of public sector banks had risen sharply after the Centre’s mega recap plan. Punjab National Bank – bucketed into the basket of relatively stronger banks (non-PCA) – was given ₹5,473 crore of capital under the Centre’s massive recap plan.

Given that the bank had received a similar sum by way of capital over the past three fiscal years ending FY17, the capital infused in FY18 was indeed a tidy sum. But contrary to the Centre’s expectations, capital infused into relatively stronger banks also have made losses on account of loan defaults and fraud rather than credit growth.

In what would probably go down as one of the worst-ever quarters for a public sector bank, Punjab National Bank reported a steep ₹13,417-crore loss for the March quarter. The disastrous performance is not altogether unexpected, given the multiple headwinds the bank faced in the quarter. The ₹14,000-crore Nirav Modi scam, the RBI’s revised framework for stressed assets and bad loan divergence have weighed on the bank’s performance.

In fact, the sharp deterioration in asset quality and capital position of the bank in FY18, could well bring the bank under the RBI’s PCA framework.


The bad loan saga

For PNB, a large stressed asset book, incremental provisioning requirement and weak balance sheet, had in any case remained an overhang for its earnings.

The break-out of the massive Nirav Modi scam and the RBI’s February circular on stressed assets have only made matters worse.

During the March quarter, the bank’s NPA provisioning has ballooned to ₹16,200 crore from ₹3,000 crore in the December quarter. The sharp increase has been despite the dispensation on marked-to-market (MTM) losses on investments in government bonds and provisioning norms for large accounts under the IBC. PNB still has MTM losses to the tune of ₹1,088 crore spread over the ensuing quarters that will impact earnings. The leeway on provisioning on IBC cases has resulted in a reduction of ₹1,684 crore of provisioning in the March quarter. This is likely to kick-in in the June quarter.

PNB’s gross non-performing assets has shot up to ₹86,620 crore as of the March 2018 quarter, which includes fresh slippages to the tune of ₹7,579 crore pertaining to the fraud at Brady House, and ₹10,237 crore on account of the RBI’s revised framework on resolving stressed accounts – doing away with all the old restructuring schemes. The bank’s GNPA ratio is now a steep 18.38 per cent of loans and net NPA 11.2 per cent.



Deteriorating financials

The PCA framework has three risk threshold levels (with 1 being the lowest and 3 the highest); and breach of capital, asset quality and profitability levels lead to banks being bucketed in one of the three threshold levels.

Under the PCA, banks with total capital adequacy ratio (CRAR) of less than 10.25 per cent but more than 7.75 per cent will fall under threshold 1. Despite the Centre’s capital infusion, PNB’s total CRAR has come down sharply from 11.58 per cent in the December quarter to 9.2 per cent in the March quarter.

Banks that have a net NPA of over 9 per cent but less than 12 per cent fall under the RBI’s second risk level under PCA. It needs to be seen if the RBI will take any action after PNB’s abysmal performance.

Published on May 15, 2018
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